Paper.com

Colleen Starkey never thought she would be able to sell paper products to the consumer on the internet. However, after five years in business Paper.com has reached $90 million in revenue. Paper.com specializes in shipping paper-related products to customers, including diapers, paper towels, and facial tissue from numerous suppliers. Because these items have a little margin, Colleen knows she needs to control costs and at the same time have high service levels.

Paper.com receives 450,000 orders annually with an average revenue per order of $200 and an average profit per order of $100. Paper.coms current order fill rate is 92%. Colleen estimates that of the orders not filled correctly or completely, 20% of the customers cancel their orders and 80% will accept a reshipment of the correct/unfilled items. This rehandling costs Paper.com $20 per order and is only applicable to the reshipped orders. To retain customers, Paper.com reduces the invoice value of rehandled orders by $30.

Paper.com pays $2,000,000 for transportation, both inbound to and outbound from its warehouses. Its warehousing costs are $1,900,000 annually. Paper.com has $48 million of debt at an annual interest rate of 10%. Other operating expenses are $1.5 million per year, and Paper.com maintains $200,000 in cash at all times.

Paper.com has an average inventory of $6 million. This level of inventory is necessary to help fill consumer orders correctly the first time. The inventory carrying cost rate is 30% of the average inventory value per year. Its accounts receivable average $ 400,000 annually. Paper.com owns three warehouses that are valued in total at $88 million. The net worth of Paper.com is $50 million.

Colleen has decided that a 92% order fill rate is not acceptable in the market and lost customers and re-handled orders are negatively affecting profits. She has decided to invest $2 million (she plant to borrow $2 million from the bank) in a new stock locator system for the warehouses, increase inventories by 15%, and improve the on-time delivery of inbound shipments by contracting with a new carrier. This carrier upgrade will increase total transportation costs by 10%. Colleen hopes these changes will improve the order fill rate to 98%. Paper.com faces a current tax rate of 35%. The cost of goods/order is $ 70.00.

You are the logistics analyst at Paper.com and have been asked to do the following:

Question:

a) Calculate the financial impact of increasing order fill rate to 98% from 92% and write your answer using the given table.

b) Compare the ROA for order fill rate to 92% with 98%

c) Describe what your suggestion is.

Answer:

a)

	92%	98%
Annual Orders
Orders Filled Correctly
Service Failure Orders
Lost Sales Orders
Rectified orders
Net Orders Sold
Sales (Revenue)
Less: Invoice deduction
Loss sales revenue
Net Sales (revenue)
Cost of Goods Sold **
Gross Margin
Re-handling Cost
Transportation
Warehousing
Inventory Carrying
Other Operating Cost
Total Operating Cost
EBIT
Interest
Tax (35% x (EBIT INT))
Net Income

** Cost of Goods Sold = Net Order Sold x $70.00

b)

	92%	98%
Net Sales
COGS
Gross Margin
Logistic Costs
Other Costs
Total Costs
Net Profit
Net Profit Margin
Inventory
A/R
Cash
Current Assets
Fixed Assets
Total Assets
Asset Turnover
ROA c)